Tag Archives: ECB

So we reached December, almost 6 months into Samaras’ administration. What was his main pre-election promise? Renegotiation. A sweet word which the majority of the people haven’t yet tasted. The recent Eurogroup meeting finished with a lot of criticism on whether this government, like the previous, actually negotiated anything. Yet, no one is complaining because most of the people struggle for the daily life, our daily bread. We’re thankful it’s not worse, says a Greek expression.

Beyond the scandals, one of the main reasons for the depreciation of Greek politicians is their unfulfilled promises. The thousands “I will” of old school politicians that have been quickly forgotten. When I look back the examples are countless. In 2009, Papandreou ran for election with a program for growth while New Democracy (and the Bank of Greece as it was later revealed) was saying that we were running low on cash. “There is money” was Papandreou motto, but we ended up finding out that we were hugely indebted and called the IMF. Before him, Karamanlis (2004-2009) declared the re-organisation and reconstitution of the State. He wanted to end years of PASOK’s dominance by changing the mentality of the public sector. Instead he filled the public sector with New Democracy voters in an attempt to balance the demographics in Ministries and state enterprises. We now know that this project was financed with loans. Before him, Simitis (1996-2004) main promise was the entry into the eurozone and, as a result, an unprecedented wave of growth. The “creative accounting” as it was called got us into the european currency, the Stock Exchange collapses in a scandalous way and, as we keep finding out until these days, millions of euros went into “personal commissions” for weapons, public tenders won by Siemens, etc. The growth that we saw was just the gift wrap of the same old shit.

For the past 20 years we are living in a fake democracy where we vote for something that is really different with what we end up in our hands. It’s like getting a ticket to Mykonos but the boat strands on some dry rock island in the middle of nowhere. Yet, we disembark without complaint.

In a conversation I had recently with a friend, we were saying that the elections is some kind of contract. One side proposes to do something and the other authorises it to do it, an agreement legitimised by votes instead of signatures. However, no one is accountable for failing to fulfil the contract’s obligations. No one is punished for this systematic fraud, where it is intentional or unintentional. We don’t investigate that either. We just end up with a collective sense of injustice and anger, treating the elections more like a small circus rather than the celebration of democracy as we used to call it. We just get the next luxurious and super-fast boat that will end up at another rock island.

The other day I was surfing on the Internet and I somehow stranded on the personal website of Adonis Georgiades, a former far-right politician turned mainstream after joining New Democracy, less than a year ago. He had a banner at the top of the page which was saying “Pacta sunt servanda”. With this profound latin quote he was trying to calm the few who were actually anxious on whether Europe will keep its promise to give us the next instalment. The “153 brave ones”, as Georgiades likes to call them, of the Greek Parliament have voted the measures the troika asked, so now Europe was expected to do its bit. How would Georgiades feel if the other side of the contract simply breached the agreement? Which is something that they will do because there will be more measures in the future, despite the government’s statement that these will be the last. The announcement of new measures, is an old measure by itself. An old trick.

Hence, my dear Greek politicians of the current and future governments, the unilateral breaching of a contract means the de facto cancellation of the agreement. Therefore, when a government is elected by promising to renegotiate a situation in order to improve it and ends up by voting worse austerity measures than the ones of their predecessors, its moral legitimisation expires.

The things that are happening are starting to be too many. They can overwhelm you. We are living in a kind of post-apocalyptic situation where everything is collapsing. Incomes, values, morality… A society that is suffocating. Here’s how I saw Greece today, 12 October 2012, through some headlines.

Unemployment has reached 25,1% (official stats for July 2012). Among young people the number is 54,2%. Yes, 1 out of 2 young Greeks is looking for a job. Needless to say that among those who are working, there is a percentage who doesn’t get paid. Employers owe more and more salaries to their employees because of cash shortages. But these are just percentages, misery turned to statistics. You only need to sit down and think that, practically, around 1.000 Greeks are losing their job every day. One thousand people. Every day.

The government is about to announce another round of harsh austerity measures. Lots of cuts and more taxes. How much more can you tax a country? How are they going to pay? Where on earth did economic growth come thanks to more and more taxes? The country gave what it had to give, now it’s time for the officials to see that their predictions for more state revenues through taxes are superficial. Some days ago, one of the biggest dairy firms in Greece (FAGE) announced that it is moving part of its operations, for accounting purposes of course, to Luxembourg. Some days later another one among the biggest Greek companies (Coca-Cola) made a similar announcement sending shockwaves to the markets.

On another weird story, the Minister of Maritime Affairs spoke to an audience at the Maritime Club of Piraeus. He told people there that the troika had this idea. To evacuate all the islands which are inhabited by less than 150 people in order to cut down on public expenses (coz they still need schools, doctors, local administration and subsidised transport connection to the mainland). Of course, it was not an official request from the troika but probably a lower level official making a joke. But the Minister, like any random amateur, said this in public. And the Minister of Finance, who in theory carries out the day-to-day negotiations with the troika, suddenly became something like a troika spokesman, denying here and there that such a request was made. And these people are serious. Our Ministers. Seriously!

This is the situation in which we live for the past two and a half months. Since August the government is spending all its energy carrying out some hidden negotiations with the troika, deciding how they are going to cut 11,5 billion euros from the state budget. One day the Greek government says “this is how we’ll do it” and the other day the troika says “you can’t raise so much money out of it-just fire 10.000 public sector employees’. Government officials, and the Finance Minister Mr Stournaras himself, have informed a number of EU, ECB and IMF officials about what the measures are going to be. But the Greek public… noooo… of course we are not mature enough yet to know. We will be the last ones to find out how much we will be called to pay, how much more tax we should give. Which other nation has been so patient to await for 2,5 months to see how its government, its supposed guardian of its interests, is going to kick our ass?

And on the top of that, a bunch of Golden Dawn far-rightists, accompanied by two of their MPs and a mob of Christian fanatics, have attempted to block the premiere of a theatrical play. A journalistreported that he got beaten by them-here’s his story made by uniting some of his tweets after his ordeal:

“At the entrance of the theatre, there were Golden Dawn and priests tearing down the show posters and stepping on them. I took out my mobile to take pictures for the blog. 5 Golden Dawners and a cop surrounded me. They ask ‘Are you a journalist?’ I say “I write for lifo”, hoping to escape a beating. Quite the opposite. They pull me aside, call me ‘faggot’ and ‘queer’, pull my beard, spit in my face, hit me in the stomach. Cops nearby. I shout “They’re beating me, do something?” Reply : I’ve nothing, move along please. The cop’s wearing 3 stars. They put a lit cigarette in my pocket. A woman standing near warns me, in front of the cop. He pretends he hasn’t heard. I start to get scared, move away from the entrance. They shout after me ‘Go away, you dirty faggot, go suck someone’s cock!’ I turn back to observe. A known Golden Dawn MP follows me, punches me twice in the face, knocks me down. Downed, I lose my glasses. The Golden Dawn MP kicks me. The police are exactly 2 steps away. Their backs are turned. Repeatedly, I shout to the cop “THEY”RE PUNCHING ME, DO SOMETHING!” Back still turned, he walks away. The rest of them shouting at me next to the police officer “Cry, you pussy, queen, little girl” We pass dozens of cops hanging out. I tell them I was beaten at theatre entrance. They ignore me. One blows me a sarcastic kiss.”

The police detained some Christian fanatics during the events. A bit later, one of their MPs, Christos Pappas, approaches a riot police bus and easily drags one of the detainees there. He set him free seconds later, with the policemen staring at him in awe, as if it was the Police Chief. Look for yourself how easy it was (most of the anti-fascist protesters who were arrested last week and were allegedly tortured inside the Police HQ in Athens are probably jealous of how easy it was for Mr Pappas to do this). Christos Pappas is with the blue suit and the tie.

Yes, my friend, this CAN happen in Greece today, as we become a less democratic state, every second day.

So the (first) elections are over, the situation is kind of normalized and we’re preparing for the next ones on June 17. Greece is a weird country when it comes to elections. Some years ago New Democracy had won an election but the talk-of-the-town was what was happening in PASOK’s leadership. Two weeks ago, New Democracy did it again. They’ve won the elections but everybody is talking about SYRIZA and its leader, sexy Alexis. So who are they? If you want to get informed, read this by BBC’s Paul Mason, whose reports on Greece are probably the most accurate accounts of foreign journalists on what’s happening here.

Well, Greeks did not become radical leftists within a night, as they haven’t been transformed to fascists either. What most Greeks were looking for in the past election was a way to express their opposition to the bailout measures and the Memoranda, an economic policy and seems more and more inefficient and unfeasible. Traditional right wing voters turned themselves to either the Independent Greeks party (centre-right voters) or the Golden Dawn party (far right party but mainly voted by traditional right wing people who are against immigrants). Though the Left had far more choices, the majority went to SYRIZA, a coalition of leftist fractions with a platform of uniting the Left (a rare motto in Greece and an perennial longing of all Greek leftists) to form a leftist government that will undo the Memorandum and cancel the loan agreements. Very appealing for a suffering Greek, isn’t it?

I personally think that these two goals are not feasible and Alexis Tsipras rather meant that he would try to renegotiate the loan agreements and the relevant measures that must be taken. Which is what he had actually caused with his 2nd position in the elections. Suddenly officials from the EU and politicians from several European countries are discussing the dead end of the current plan and are pointing out the need for a slight change or easing of the measures. There is simply no foreseeable solution and exit from the crisis with the current plan. And this fact is the only victory of Greece on a European level, not just since the last elections but during the past 2,5 years.

A cartoon of Angela Merkel and Alexis Tsirpas by German caricaturist Reiner Hachfeld.

You see, Greeks had seen the Papandreou and Papademos governments passing measures that were dictated by the EU, the ECB and the IMF without any attempt of negotiation. They’ve seen Papandreou going abroad and having new measures in his suitcase upon his return without any complaint. Samaras participated in this theatre not because he believed in the rationale of these measures but because he succumbed to another PASOK’s blackmail (either you’re on Greece side a step before bankruptcy or you’ll be responsible for its suicide) back in late 2011. So now there is a feeling that only SYRIZA and Tsipras can a) unite the Left in Greece to form its first leftist government and b) renegotiate the Memoranda. And Europe? Europe is scared of him. Europe is scared the shit out of him simply because they can’t control him and because he might mean what he says.

It’s true that SYRIZA has been a bit confusing as to what exactly they are going to do if they were to form a government. The party, an until recently small leftist party composed of different fractions that tolerated different opinions within the Left, has seen several of its members announcing contradicting promises. Its ennemies, PASOK and New Democracy basically, have used this to their favor. They started a huge campaign to discredit SYRIZA by reminding us on a daily basis of what would happen if SYRIZA comes to power. The EU has followed suit and here we are now, having daily predictions of a post-apocalyptic, Armageddon-style Greece if SYRIZA wins the elections. The whole joke, apart from a daily news item, has now gone viral, it has its own hashtag on Twitter (#ftaei_o_syriza) and is slowly entering the internet meme sphere.

I decided to create a special category of posts in this blog that would contain only these threats – I called it “The Daily Threat Show“. Come back and visit this page (or simply RSS it), I guarantee a lot of fun and also a glimpse of how Greek people’s brains are bombarded with such absurd prophecies and will then be called to vote as reasonable people. Ask any Greek in the street if he knows what will happen after June 17 and you will understand by the confusion in his answers.

But a confused Greek in the street is probably not an originality. Greeks have been confused since 2010 when they were suddenly called to have mature opinions on issues of high Economics. Europeans have always seen the Greeks as a confused people. They were asking themselves: so what do these Greeks want anyway? Why do they protest? Will they solve their problem by breaking one more bank? A foreign journalist (from a eurozone country) came last year to Athens and asked me: So, explain to me, why don’t you want our money?

Alexis Tsipras in a photoshoot by high school students’ magazine “Schooligans”

If Greeks are confused, Europeans are almost schizophrenic. The narrative they’ve adopted is “Greece is given money, they should shut up and do what we say”. They’ve no time to examine the measures asked from Greece to take. They are not in a position to know whether it’s a feasible plan. They are not here to see the misery caused together with the lack of hope for an exit from the crisis. And as they are confused too, they are also afraid of the uncertainty. Here’s a short story to illustrate this.

A foreign journalist came to Greece and we were discussing the situation. This is the dialogue we had.

Foreign journalist: Greece has falsified its statistics in order to enter the eurozone. I’m sorry to say this but Greece was corrupt, it has cheated and now it’s time to pay.Me: Yes but people in Europe knew that Greece was cheating. And Greece was not the only country which altered its stats in order to achieve the eurozone criteria.Foreign journalist: Who knew?Me: A lot of people knew and certainly several EU officials.Foreign journalist: Really? Who knew?Me: Certainly the Germans knew about Greece and Italy. And part of the corruption was carried out with German money, through the scandals with Siemens and the German submarines.…Foreign journalist: Why the hell would Greece want a leader like Tsipras? He is going to get you out of the eurozone. His proposals are not realistic, are not feasible.Me: I partly agree but you’re contradicting a bit now. I know, you know, the Greeks know that their previous governments, as you said, were corrupt. This crisis is happening because of them, of how they handled the situation for at least the past 10 years.Foreign journalist: Right.Me: So Greeks finally realize that these politicians are corrupt and they decided to take them down from power. That should please the EU, if it had a problem with their corrupt mentality.Foreign journalist:…Me: Tsipras is a young politician, inexperienced yes, but certainly not the like of the previous ones. So Greeks are choosing a new guy to govern them and the EU gets scared. You know why?Foreign journalist: Why?Me: Because they can’t, or don’t know yet if they can, control him. Because he is unknown.

This is a great example if you want to see how a responsible Greek politician behaves in times of crisis. In May 2010, when Greece was about sign the IMF/EU/ECB Memorandum, Michalis Chrysochoidis was not just another Socialist MP but the Minister for Citizen Protection (one of the high profile government posts). Yesterday he was invited to talk to a news program at SKAI TV. The discussion was around a recent criticism on the terms of the Memorandum, highlighted by former Prime Minister Kostas Simitis’ speech at a conference in Berlin. This is the video excerpt from SKAI TV and below a quick translation.

Journalist: Let me ask you directly. How many hours did it take you to read the Memorandum? Because Mrs [Louka] Katseli (the then Minister for the Economy, Competitiveness and Shipping) said yesterday that she was given the Memorandum on Saturday night and spent two hours on reading it and this is how she went to vote on it. Have you read what the creditors have written down and did you have a different opinion than theirs? Were you aware of what you were about to sign?Chrysochoidis: Are you serious?Journalist: Absolutely.Chrysochoidis: These things were discussed in the Parliament… No, I haven’t read the Memorandum at that time because, simply, I had other obligations. I had other duties…Journalists: Excuse Mr. Minister, this is very serious. How did you sign it? Did you sign a text that commits the country for an eternity and that is responsible for the mess in which we are now and you are telling us that you didn’t read it? How can you say this so easily?Chrysochoidis: Look, in politics things are not like that. Journalist: How are they?Chrysochoidis: Some of my colleagues had negotiated, some of the responsible members which represented the government had negotiated and brought that legislation into the Parliament and, as you remember, it was voted by the majority of the Parliament, by PASOK and LAOS if I remember well.Journalist: Is there a direct responsibility on the economic staff of the then government [i.e. the Minister of Finance George Papaconstantinou]?Chrysochoidis: As I told you before, it was done so under a state of panic in view of a possible suspension of payments which was a threat over our head. My job at that time was to re-organize the Police, the Fire Brigade, to create the DIAS team [a Police group which patrols in motorbikes], to fight crime. It was not my job to study the Memorandum.

So Mr. Chrysochoidis just said that he signed one of the most important legislation passed in this country without even reading it. He just went the next day to the Parliament and voted for it like an amateur politician. Like a virgin! He didn’t have the time because he was re-organizing the Police which indeed showed a great zeal to crush the demonstrations taking place in the center of Athens. It was the same days when three people were burned in the fire of Marfin Bank, a collateral damage of that day’s violent chaos. The DIAS team were roaming the streets like horses of the Apocalypse, attacking protesters. And yes, crime, there wasn’t much of it that day because the political head of the Police devoted all his time on the issue rather than having a look at the Memorandum.

Louka Katseli and Michalis Chrysochoidis getting bored during some speech (it was probably an important one)

Some key things to note which will make some (more) sense. There is a widespread criticism on the terms of the Memorandum even by PASOK MPs, now that the old PASOK (that of George Papandreou) is crumbling. Everyone one is trying to clear his/her name, to distance themselves from the shame of “having been part of it”, preparing for the next day, or simply for the coming elections. Let’s not forget that Mr. Chrysochoidis has declared that he intends to challenge for the PASOK leadership which will be decided very soon. But let’s not be in a hurry and put all the blame to Chrysochoidis for simply telling us the truth. Most, if not all, of the MPs had literally a few hours to read the Memorandum. Among the virgins, there were some prostitutes too.

“We were like prostitutes after their first time” a top government official confessed in his attempt to describe the Cabinet member’s psychological situation during their meeting to sign the Memorandum, on the 5th of May 2010. “We were looking at each other and we were all pale” he says. “We felt very ashamed since we couldn’t believe that we, PASOK, led Greece to the IMF, having chopped the salaries and the pensions”. And then he concludes “Since then we have been completely prostituted. We’ve done the same things over and over again without feeling any shame”. Almost all PASOK politicians admit in private that the Memorandum, despite its provision of some necessary reforms, is synonymous at the same time with the sentencing of the economy to a prolonged depression and with the mortgaging of the country to its lenders. However they recognize that it was the last choice in order to avoid bankruptcy and to secure the savings and the pensions, especially since the government had previously failed to implement the prior solutions.

“The Memorandum was hastily written by us and the troika” admits a high-ranking government official who participated in the (so-called) negotiations. “We had no idea of what we were writing and the troika experts were equally confused, working under great pressure from the European Commission and the IMF”. According to first hand accounts, the slightest preparation hasn’t been made and simply, on the last moment, they isolated part from older IMF Memorandums as those with Turkey, Mexico or Hungary and they would hurriedly adapt them to form the Greek Memorandum. “It’s a bad compilation, a Frankestein-styled Memorandum” says a Minister who admitted that he had less than three hours to read, understand, evaluate and approve the part of the agreement which would commit his Ministry for the next four years.

Obviously this Minister was not Chrysochoidis.

Michalis Chrysochoidis is currently Minister for Development, Competitiveness and Shipping.

I just read a detailed account of the backstage negotiations during last Spring and the dramatic, for the EU and especially for Greece, months that followed. It’s a must read for anyone interested. It is the product of a Wall Street Journal investigation, based on more than two dozen interviews with euro-zone policy makers. It reveals how the currency union floundered in indecision—failing to address either the immediate concerns of investors or the fundamental weaknesses undermining the euro. The consequence was that a crisis in a few small economies turned into a threat to the survival of Europe’s common currency and a menace to the global economy. Enjoy the reading. It’s long, even though slightly reduced by me, so go get some coffee and a couple of cigarettes.

At a closed-door meeting in Washington on April 14, Europe’s effort to contain its debt crisis began to unravel.

Inside the French ambassador’s 19-bedroom mansion, finance ministers and central bankers from the world’s largest economies heard Dominique Strauss-Kahn, then-head of the International Monetary Fund, deliver an ultimatum.

Greece, the country that triggered the euro-zone debt crisis, would need a much bigger bailout than planned, Mr. Strauss-Kahn said. Unless Europe coughed up extra cash, the IMF, which a year earlier had agreed to share the burden with European countries, wouldn’t release any more aid for Athens.

The warning prompted a split among the euro zone’s representatives over who should pay to save Greece from the biggest sovereign bankruptcy in history. European taxpayers alone? Or should the banks that had lent Greece too much during the global credit bubble also suffer?

The IMF didn’t mind how Europe proceeded, as long as there was clarity by summer. “We need a decision,” said Mr. Strauss-Kahn.

The dispute at the Washington meeting divided two of the Continent’s grand old men, both of them born in 1942 and both among the fathers of the euro.

Wolfgang Schäuble, Germany’s ascetic and irascible finance minister, understood the IMF’s ultimatum. The euro zone would have to draw up a second bailout package for Greece by summer, just a year after a loan deal for €110 billion, or $140 billion.

But this time, Mr. Schäuble said, “We cannot just buy out the private investors” with taxpayer money. That would reward reckless lending, he said, and it would never get through an increasingly impatient German parliament. Greece’s bondholders would be required to lend more money, Mr. Schäuble proposed, rather than take payment for their bonds at maturity.

Jean-Claude Trichet, the urbane French head of the European Central Bank, warned against forcing bondholders to put in more money, which would effectively delay repayment. “This is not a good way to go in a monetary union,” Mr. Trichet said. “Investors would avoid all euro-area bonds.”

Mr. Trichet, in the twilight of a 36-year career as a finance official, feared that if Greece didn’t honor its bond debts on time, the implicit trust that kept credit flowing to many weak euro-zone governments would shatter. More countries and their banks would lose access to capital markets, in a chain reaction with incalculable consequences.

The April meeting ended inconclusively.

Meanwhile, the cost for fixing Greece was rising. The Athens government’s budget deficit was stuck at a stubbornly high level.

Italian and Spanish borrowing costs were still affordable and stable. The yield on Spain’s 10-year bonds hovered around 5.3%; on Italy’s, around 4.6%.

The debate over making bondholders contribute to the new funding package for Greece—known as private-sector involvement, or PSI—divided euro-zone countries.

Germany had allies. In the Netherlands and Finland, new governments had promised voters they wouldn’t pay for problems in less-frugal Mediterranean countries. Breaking those promises would risk rebellions in parliament.

But France joined the ECB in resisting burden-sharing by bondholders. France’s banks had lent more heavily than Germany’s to Greece and other indebted euro nations, and France fretted about a Lehman Brothers-style banking-system meltdown. Italian officials also feared that a precedent for losses in Greece would scare investors away from Italy’s bonds.

The report was half-right. There was a meeting, but Greece was staying put.

Inside a country chateau, top euro-zone officials told Greece’s finance minister they expected deeper austerity and faster reforms in return for a new aid package.

Then Mr. Schäuble said he wanted to discuss how bondholder burden-sharing would work. The usually smooth-mannered Mr. Trichet lost his patience. “I want to put my position on the record,” he said: “I don’t agree with private-sector involvement, so I won’t take part in a discussion about the practicalities.” He stormed out.

Mr. Trichet’s assent was vital. If the ECB were to stop accepting Greek bonds as collateral for its lending to banks on the grounds that the bonds were in default, then Greece’s banks, which were stuffed full of their government’s bonds, would quickly run out of cash and collapse. That would radically drive up the cost of a rescue.

In Greece, a new wave of mass strikes and demonstrations was starting. Protesters, angry about Europe’s imposition of extra spending cuts and tax hikes, clashed with police in front of the Athens parliament in the biggest and most violent protests in a year.

Spanish and Italian bond prices remained stable. But Europe was at a dangerous impasse over Greece.

Many euro-zone governments hoped Mr. Strauss-Kahn could find a way to relax the IMF’s summer deadline. The IMF chief was due to discuss the matter with German Chancellor Angela Merkel in Berlin on May 15, and with euro-zone finance ministers in Brussels the next day.

Mr. Strauss-Kahn couldn’t attend. Police in New York pulled him off his Paris-bound flight and charged him with sexually assaulting a hotel chambermaid. (The charges were later dropped, and prosecutors said they doubted the maid’s reliability.) An aide phoned Ms. Merkel at her central-Berlin home that Saturday and told her the news. The astonished chancellor responded with a German idiom that translates roughly as: “You couldn’t make this up.”

The IMF sent a lower-ranking official to Brussels in his place who had no latitude to deviate from the IMF’s deadline.

In Athens, meanwhile, a tent city of the “Indignant” protest movement—a groundswell of anger at the country’s impoverishment—sprang up outside parliament. Spain’s bond prices began to wobble as investors worried that other countries might also face debt restructuring.

On June 1, Mr. Schäuble’s deputy, Jörg Asmussen, presented a German plan at a meeting of finance officials in Vienna, at the Hofburg palace of the former Habsburg emperors. It involved pressuring Greece’s bondholders to swap their Greek debt for new IOUs that would come due far in the future. That would cut the amount of European taxpayer funding Greece would need.

After a meal in a palace banquet hall, the officials quarreled into the wee hours.

For the ECB, Mr. Trichet’s deputy Vitor Constâncio, of Portugal, denounced the German plan as “dangerous.” Credit-rating agencies would declare Greece to be in default on some of its debts—a so-called selective default. In that case, Mr. Constâncio warned, the ECB would refuse to accept Greek government bonds as collateral, dealing a death blow to Greek banks. France, Italy and Spain all supported Mr. Constâncio.

Germany’s Mr. Asmussen shot back with a threat of his own. Europe needed Germany’s money to fund a new program of Greek loans. “Without private-sector involvement,” he said, “there will be no program.”

Greece was descending into chaos. Embattled premier George Papandreou’s slender majority in parliament was fraying. On June 15, a swelling demonstration in Athens’s central square veered out of control.

Alone in his office, Mr. Papandreou phoned the parliamentary opposition leader and offered to make way for a national-unity government. Talks broke down, and the Greek government limped on badly wounded.

Even Ms. Merkel had some doubts about her finance ministry’s hard-line insistence that Greece’s bondholders take a loss. On June 17, she discussed a softer plan with French President Nicolas Sarkozy: a gentleman’s agreement under which Greek bonds would be honored but the bondholders would volunteer to buy new ones.

Mr. Schäuble pushed back. The veteran conservative politician was Berlin’s biggest supporter of the European dream, but he was also the keeper of Germany’s purse. He was determined to make banks share the burden with German taxpayers, and he didn’t trust them to keep a gentleman’s agreement.

When finance ministers met again on June 20, Mr. Schäuble pushed harder. Greece’s bondholders should be told not merely to accept a delay in repayment, he said, but also to forgive some Greek debt—a so-called haircut.

As Greece’s economy moved toward free fall, its debts were soaring beyond the country’s ability to pay, the Germans and their northern allies argued. Mr. Trichet and the southern countries resisted. Talks dragged on for hours. The ministers knew they couldn’t leave without some agreement.

They tried to please everyone: Greece would get more aid. Bondholder losses would be substantial, to placate the Germans, Dutch and Finns. But as the ECB insisted, they would avoid pushing Greece into selective default.

Europe hadn’t resolved how to keep Greece afloat. The IMF—whose demand for a decision had set off the whole argument—softened its ultimatum. IMF officials said they were satisfied that Europe would sort out some kind of new bailout, and wired Greece its summer aid payment on July 8.

It wasn’t enough to calm markets. Spain’s bond yield hit 6.3%. Italy’s rose to over 5.8%. Such borrowing costs, if sustained, would make it hard for both countries to rein in their debts.

The selloff in bond markets forced leaders to call an emergency summit for July 21.

Determined not to let the summit pass without an agreement, Ms. Merkel invited the French president, who objected to the German push for bondholder losses, to Berlin. The pair and their advisers met for dinner in the German chancellery the night before the meeting.

Few of them had time to touch the duck breast and vegetables on their plates as they searched for a compromise. Finally, Mr. Sarkozy said he would accept the private-sector involvement—if Ms. Merkel dropped her resistance to giving the euro-zone bailout fund broad new powers to buy debt of weak countries directly and move to protect such countries as Spain and Italy from bond-market contagion. Ms. Merkel agreed.

One more person needed to sign off. Ms. Merkel phoned Mr. Trichet at his Frankfurt office. He took the last Lufthansa flight to Berlin and arrived at the chancellery around 10 p.m.

Reluctantly, Mr. Trichet gave his OK. But he set conditions. Governments would have to insure Greek bonds against default so that the ECB could continue to accept them as collateral. And they would have to make plain that no other euro country but Greece would have its debts restructured.

The trio’s deal was both complicated and vague. Their staffs had little time to flesh out details before the next day’s summit in Brussels. As leaders trickled into the European Union’s boxy headquarters, Ms. Merkel faced a challenge to placate the euro zone’s south, which thought private-sector involvement was dangerous, and its north, which thought it didn’t go far enough.

When the leaders assembled at the sprawling summit table, Ms. Merkel admitted that the specter of bondholder losses was causing market unrest. But, she said, some Greek debt relief was essential. Without it, the bailout’s tough austerity conditions—made tougher by Greece’s missing its budget goals—would be seen as unbearable.

“If Greece had met its program parameters in April,” she snapped, “that would have helped.”

All 17 euro nations had to agree to private-sector involvement. But presented with a calculation that the plan would reduce Greece’s debt by only about €19 billion out of more than €350 billion total, Dutch Prime Minister Mark Rutte balked. If it’s only €19 billion, he said, “I’m out. I need more.”

Finnish premier Jyrki Katainen also complained. His parliament wanted collateral in exchange for more Finnish lending to Greece. “No collateral, no agreement from me,” he said.

Then it was Slovakia’s turn. Prime Minister Iveta Radičová was fighting to keep her coalition together over aid for Greece—a richer country than her own. Adding more powers to the bailout fund “would be suicide,” she said.

Greece’s Mr. Papandreou pleaded for help. “If we can’t solve even Greece, we won’t be seen as being able to solve anything else,” he said.

Hours later, the leaders had a communiqué. To appease the holdouts, it left key points broad and noncommittal, offering the possibility of collateral to Finland and describing the complex bondholder deal in a few strokes, vague language that would return to haunt the bloc.

Investor confidence faltered as it became clear that Europe’s compromise achieved the worst of all worlds. Greece would be pushed into a historic default—the first time in nearly 60 years that a developed, Western country wouldn’t honor its debts. But the default was so small that Greece was still left with a crushing debt burden.

And then official Europe went on vacation: Ms. Merkel to the Italian Alps, Mr. Sarkozy to the French Riviera.

Bondholders didn’t. They went on a rampage.

This article was written by Charles Forelle and Marcus Walker. Stephen Fidler, David Gauthier-Villars, Sudeep Reddy and Brian Blackstone contributed to it.

Wall Street Journal also produced this documentary, called “Europe at the Brink” in which WSJ editors and reporters examine the origins of Europe’s debt crisis and why it spread with such ferocity to engulf much of the continent and threaten the entire world.